Spanish Real Estate Investing (3 of 10)

Spanish Real Estate Investing guide - (3 of 10)

Choose your type of investment. Fix & Flip? Or buy to rent? Residential, touristic or commercial?

That is our third article in a series of 10 articles. The objective of these series is to share our knowledge of the real estate market in Spain. We know that investing internationally can sometimes be challenging, but we want to make our small contribution, helping to alleviate possible difficulties. All the information contained on this guide is based on our experience operating in the Spanish market.

Introduction

In most countries, investment in real estate is equivalent to buying properties for rent. That is one of the approaches that could be taken. Some of the reasons why investors prefer that type of investment is because they think it is the safest and most stable way to invest. Also, because it is easy to understand the business mechanism. One of the mistakes of many investors is to treat rental investments as a passive investment, not as a business. It is really more passive than managing other types of businesses, but in most places, you will need some expert knowledge of the subject and use part of your free time to manage your properties.

However, it is true that rents in Spain are more passive than in other countries, we will explain later.

Our specialty in Bluebricks are the operations of Fix and Flip, we will analyze why “investments” are a safer investment than other investments in real estate. Maybe, not stable, but the return on the general investment is higher.

But to conclude the introduction, the main point of the article is to have a diversified portfolio. At the end of the article, we will describe some portfolio profiles, which will help even the most conservative investors.

Fix & Flips

Our favourite! Let’s not lie about that: Fix & Flips are complicated, you need specific knowledge of the market, experience and advanced social skills. You could do operations without all that? The answer is Yes,  but it is much riskier and it will be difficult to carry out operations in less than a year.

For beginners, a flip operation, is when you buy a property to be renovated and then sell it.

Why do we say it is safe as an investment? Or even more secure than traditional rentals? The main reasons are: the time it keeps in your portfolio, and also the risks involved in having tenants on their properties.

If you keep the property for less than a year (or even less than half a year), you will no longer be affected by macroeconomic trends or real estate cycles. Of course, it is affected by economic recessions, but if you buy with moderate prices one year and sell in the same year, you can sell even in unfavorable economic scenarios.

In Real Estate, having people who interact with one’s property is risky, that is one of the reasons why many investors in Spain leave their property empty (expecting an increase in prices). Tenants can cause many problems: from not paying the rent to subleasing or damaging the property. Avoiding those risks is part of the virtues of Fix & Flips.

Other risks that you could avoid through this strategy:

Short-term investment is really liquid, and for that reason, it is easy to find new, more profitable investments. If you invest in the long term, you are missing the opportunity to find new opportunities.

As the expected ROI for a “flip” operation is greater than 12-15% (in 6 months or a year), if you are “simply” renting the property in the long term, you are losing the flip performance.

For example: if “flipping” a property of 100k investment, you grant a margin of 18,000 euros for one year of work, instead of renting the property for 8,000 euros a year, that means you are generating 10,000 euros more per year. . You are more than doubling your profit! Imagine, if you do it every 6 months.

What risks are involved in our strategy? Many!

Most of the risks are related to the lack of experience and knowledge. These risks could be totally avoided with the proper knowledge.

What are the risks we are talking about:

  • Excessive costs in renovation works. Make sure you understand how much the complete renovation costs and each related item (materials, labor costs). The negotiation of renewal times is important. To have a lawyer writing for you the contract is mandatory.
  • Overestimating the selling price. Conduct a small market study, talk to everyone and look for information online or offline.
  • Technical problems related to the renovation. Be sure to do a good renovation,  all errors that your contractor commit, will reach you in the future.
  • Problems related with the agents that you’re dealing with: neighbours, buyers, sellers,.. your product and plans should be almost perfect.
  • Administrative risks: licensing and transaction costs could be a source of multiple delays, additional costs and other headaches.
  • Impartial advice from your collaborators (architects, contractors, real estate agents).
  • Purchasing expensive properties.
  • Purchasing on the wrong location.
  • Try not to involve too many agents in your operations, more people involved will generate more problems. That is one of the reasons why we recommend maintaining a minimized interaction with banks or the public sector. A mortgage will be a bureaucratic trap, especially in short-term operations, try to pay in cash.
There are many more risks, but as a rule of thumb, keeping everything under control will mean to keep costs down and avoid troubles.
Anyway, we think, that if you have time to spend, that strategy it’s totally worth the risks or the time spent.

Conservative strategy for "flips" or at least a good mindset

For someone that is not a professional on that matter, is to buy a property to do a “flip” and if you don't reach the expected selling price (after of few months of listing the property), you could rent it. That strategy is perfect for low value distressed properties, doing a low cost renovation (for example: 15.000 euros) will help you to reach a good margin, even if finally you should rent it. If your focus it’s just on the “flip”, you need to do a more appealing renovation (25.000 euros).

Traditional long term rentals

Property management in Spain against other countries differs a little, specially in comparison with countries like the US or UK, where the maintenance and the relation with the tenant is really important. For that reason, in these countries, the management of the property is much more active and risky than in Spain, more like a business. And of course, there are much more costs involved. Knowing that rentals in Spain are almost close to a passive investment, we could find many good deals with small operational costs.

We could say that in Spain you will be able to find good yields, of course, not in the main city centres (Madrid and Barcelona), but you will be able to find properties yielding from 6% to 10% in many second tier cities (yields could be higher if the aim are the student accomodation rentals).

The key on finding good rental operations is to visit many properties and offer big discounts. Demand on rentals is that high, that even on bad locations you will be fine. The main challenge in Spain is regarding the fact that tenants are really well protected: to evict a tenant that hasn’t paid the rent for few months, you will need to deal with lawyers.

Commercial Real Estate

That kind of investment is the most conservative one, specially if your targets are F&B, logistics or supermarkets. Retail is no longer as safe as it was, but if your budget is huge, you could target on prime locations (for really conservative returns).

Also, another kind of strategy could be:
  • Find about the different requirements that expanding chains are following in order to open new branches. Could be banks, supermarkets, big retail stores,..
  • Find the proper location and a plot of land that suits these companies.
  • Negotiate a rental agreement with the expansion department of the selected company. A minimum of 10% yield will be our target and you need to make sure that this contract is going to be binding for at least 15 years.
  • That kind of agreement means money! You could go straight to the bank, and ask for a mortgage in order to develop the commercial property. 60% LTV could be an attachable number, the rest, should be financed by yourself.
  • Once you have the money to develop the property, you could start the construction and start getting the rent payment.

You could apply that model to many industries: from restaurants, hotels, logistics companies,..

Good strategy for all pockets

A good strategy for all the pockets is to buy small distressed properties on very central locations. The trick is to buy really small and distressed properties. Another trick is to buy straight from owners that want to retire from their businesses. These kind of properties are very stable against economic downturns, if you keep the rent low, you will find many small business owners willing to install themselves on a good location.

Offices could be interesting, but with the new trend of huge coworking spaces and new innovative developments on this field, will be difficult to be a competitor on this niche.

Some of the pros of that kind of investment against residential:
  • In case that your tenant is not paying the rent, is much easier to evict a tenant from a commercial property than a residential one.
  • If the property is in good location, will be really easy for you to find new tenants.
  • The maintenance costs are much lower, and most part of the work is covered by the tenant.
  • On commercial property there are many tax deductions involved.
  • The price per sqm is much lower than a residential property.

A good balance of residential and commercial properties is essential for a medium or large portfolio.

Touristic accommodation

This kind of investment is one of the most active ones. You need to treat it more like a business than a passive investment. Here, we are not just talking only about Airbnb flats or similar, but also about owning a hotel or a guesthouse. There are many ways to invest in tourist related real estate investments. It has become a trendy investment, mainly due to Airbnb. But not all the properties that are on that platform are profitable, you need to do an active work and your own strategy to reach the desired profitability. Otherwise, you will not surpass the average yield of a long term investment.

It’s becoming more and more difficult to get a license at the best urban spots, for that reason it’s really recommended to do some market research before selecting the right spot for you. For licenses you need to speak straight to the city council. But for prices and market info, there is a tool that for a fee, it shows you the information of the airbnb market on the desired location: https://www.airdna.co/

Aside from the obvious reasons (higher yield), some of the reasons why Airbnb has become that popular in Spain is because you could get an income of the property without binding yourself to the long term rental laws (which are very restrictive for the landlord). Also, because eviction is not necessary for short term rentals. In the case of bigger investments, you could do well in many locations in Spain. But all the obstacles that you could have with a single Airbnb flat, you will face them multiply it for a hotel, guesthouse or aparthotel.

It’s interesting to have a small percentage of your portfolio dedicated to short term rentals, but in case that you want to focus exclusively to that kind of investment be prepared for the amount of time than you will need to spend managing your properties. If you only have one or few Airbnb apartments and you don’t have time to managed it, could be a good idea to hire a property management company. Normally they charge between 20-25% of the income generated.

Alternative investments

Perfect tools to diversify your assets. These kind of investment vehicles are the perfect way to invest in assets that otherwise will be impossible to reach with your budget.

Real estate investment funds managed by a company specialized in a niche. The dividends delivered are usually the income from the rental properties held by the fund. Normally, the return is lower than a long-term rental, but since your share will be diversified with many assets, we could consider that type of investment, since it is safer and trouble free. The REITs are classified by their kind of investment, normally they’re specialized in a kind of asset: hospitals, homes for the elders, hotels, offices,…

Most part of the crowdfunding platforms work online and are just an intermediary that offers opportunity investments (in exchange of a fee). These investments are made with many investors that gather enough capital to carry out the desired investment. The return on investment is obtained by rental income from the asset or by increase on the value of the property after few years or could be both options combined.

Investment Real Estate portfolio profiles

Some points about our investing profiles:
  • You could actually own the properties, or you could invest in REITs or crowdfunding or other kind of crowd investing. Also, you could own half of your portfolio, and the other half invest with other investors. An alternative pretty conservative profile would be: 50% rentals (personally owned) + 20% REITS + 20% reliable crowdfunding platforms (B2B lending…) + 10% real estate companies on the stock market.
  • The percentages are only a suggestion, you could mix them in the most profitable way for you.
  • The portfolios we suggest should be part of a bigger portfolio where real estate is one the investments selected. Try to keep yourself diversified with different kind of assets.
  • Conservative profile doesn’t mean less risky, but less time involved on the management. Also, more traditionally focused investments.
  • For some countries, some kinds of investments could be more conservative than others. For example: in some developing nations, that rely most part of the economy on tourism, could be more conservative to invest most part of your portfolio in touristic accomodation and small share on long term rentals for locals. Also in markets, where the laws are pro tenant or don’t have a 100% respect on private property. For example: in some caribbean nations, that could be a good option.

75% Fix&Flip operations

25% touristic accommodation

55% Fix&Flip operations

15% touristic accommodation

15% commercial properties

15% overseas rental properties

25% Fix&Flip operations

25% touristic accommodation

30% rental properties

10% commercial properties

10% overseas rental properties

30% Fix&Flip operations (operated by others)

20% commercial properties

40% rental properties

10% overseas rental properties

10% overseas rental properties

25% commercial properties

65% rental properties

25% commercial properties

75% rental properties

We have been in this changing market, adapting to the new context, and evolving with it, improving our capabilities as investors. For that reason, this guide was designed in order to help the investor (from amateur investor to senior) to avoid problems and get the desired ROI.

Please, feel free to have a look to the rest of our guide and our website. You will find the index of the guide below these lines.

  • Introduction (1 of 10)
  • Choose your local Market. What's the best city or town to invest? (2 of 10)
  • Buy distressed. How much it costs to rehab a property? How to rehab a property? (4 of 10)
  • How to deal with the different agents? Buyers - Sellers - Real Estate Agents - Others (5 of 10)
  • Banks. How to deal with the banks and how they behave in Spain (6 of 10)
  • Pricing. At what price I should sell? The maths behind the investment (7 of 10)
  • How to find properties? Online & Offline (8 of 10)
  • Risks. What kind of risks are involved in Real Estate investing in Spain (9 of 10)
  • Taxes. Taxes involved on the purchase, tenure or sale (10 of 10)

(aUTHOR)

I'm the operations coordinator of Bluebricks. I'm the guy managing all the operations related to Real Estate. Check my Linkedin profile here: https://www.linkedin.com/in/adriacre/

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